Question
What is the equity risk premium in CAPM?
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Answer
E(RM)−Rf, the market's excess expected return.
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Question
What does the Capital Market Line apply to that the Security Market Line does not?
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Answer
Efficient portfolios only.
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Question
Why does CAPM use eta rather than total volatility to determine a security's required return?
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Answer
Because only systematic risk cannot be diversified away.
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Question
Which CAPM assumption says investors agree on expected returns, volatility, and correlations?
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Answer
Homogeneous expectations.
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